XBI Unusual Option Activity Report

Another Monday and another Vaccine story lifting biotech and ETFs like the SPDR S&P Biotech ETF (NYSEARCA: XBI). Today, it was Moderna Inc (Nasdaq: MRNA) announcing its vaccine was 94.1% effective and was 100% effective at preventing severe forms of COVID-19. Also, the phase 3 clinical study showed no serious safety concerns among the 30,000 participants in the study. Of course, this leads the company to seek emergency use authorization (EUA) from the U.S. Food and Drug Administration.

With such great news, why are some traders turning bearish on biotech as an industry? After all, MRNA finished 20% higher on Monday and XBI finished 1.32% higher on the session. That represents a new all-time high for both stocks.

Let’s take a closer look at Today’s option activity.

XBI Option Activity

Monday’s option volume on XBI finished at 7.7 times the average and a put-to-call ratio of 9.5. The call option activity was only 1.3 times the 5-day average and was dwarfed the 61,030 put options that were traded. The fills didn’t provide a lot of initial direction with 65% getting filled between the market. However, a closer look at the activity tells a story. Here are the details of a spread trade that was made on Monday:

• 8,000 31 DEC 20 $125 put BOT @ $2.50 mostly in one print of 5,990 contracts
• 8,000 31 DEC 20 $110 put sold @ $0.20 mostly in one print of 5,990 contracts

This trade represents a long put vertical option trade. The trade maximizes its profits if the stock price is at $110 or less for a maximum gain of $1270 per contract and has 31 days to reach that level.

Clearly, the probability of reaching max gain is small but the trade breaks even with the price at $122.70, which is a little more achievable. The current expected move for this expiration is nearly $9, which places the breakeven at the edge of the expected move.

XBI Technicals

XBI made a significant breakout on November 4, the day after the election. The breakout occurred on significant volume and has since rallied an additional $10. That $10 move was approximately the trading range from July through October when it vacillated between $110 and $120. The projected move based on the breakout would have the price near where it is currently trading.

Measuring the initial seed wave of its current trend would place the target range for the trend in the $137.50 to $143.50 range. Those values are approximately 223.6% and 261.8% of the initial move, respectively. That would indicate upwards of $10 of potential upside in the near term.

(Click on image to enlarge)

Conclusion

The trade that was made on XBI is somewhat of a lottery ticket trade based on a large move lower in biotech. While the technical picture still looks strong, sometimes this is when these types of trades work out the best given their low probability, low risk, and high reward attributes.